A revolving loan is a banking product intended for entrepreneurs or companies. It works on the principle of repeated drawing and repayment of the provided amount. Revolving in English means “renewing”. The loan is therefore set as short-term, but there is a possibility to constantly renew it and thus ensure the company’s ability to manipulate funds before the payment of its issued invoices for receivables. The loan is automatically renewed in the original amount within the approved limit agreed between the bank and the client, as soon as this part of the loan, or the entire loan, is repaid. One could basically say that a revolving loan is an “overdraft” for companies, but unlike an overdraft, it is purposeful in nature.
In other words, a revolving loan is intended to finance the company’s current operating needs, to pay receivables or to purchase inventories. You can, of course, draw it in dollars, but in most cases also in selected foreign currencies.
Revolving loan – conditions for obtaining
As with all products on the market offered by competing banks, the benefits of a revolving loan vary according to your needs. In essence, banks agree on the requirements leading to the successful establishment of a revolving loan. The basic condition is determined by the fact that the revolving loan is intended exclusively for natural persons.
In the case of a loan application, there are basic information about the company within which you intend to draw a loan, information on the subject of financing, a document proving legal personality in relation to the company and at least 2-3 ending tax periods of the company’s business. At the same time, no payment from you to the social insurance company or the relevant health insurance company may be in arrears and the company may not be subject to bankruptcy, liquidation or liquidation. Another obligation of the client is the need to have a current bank account maintained at the bank with which you are applying for a loan.
The amount of the loan is fixed at a certain maximum amount or calculated individually for the specific company applying for the loan. In practice, the drawn loan amount is regulated according to the current state of the financed assets and client requirements. However, there are also banks that will lend you a specific maximum amount, up to 330,000, depending on how the loan is secured.
Methods of guarantee for a revolving loan
The most common way of securing a revolving loan is then liability for trade receivables – ie issued invoices of the company for their products, goods or services. A less frequent but possible way of guaranteeing is real estate guaranteeing (in which case the bank is willing to make a loan available to the client up to 85% of the total determined value of the established real estate). Other possible ways of securing a revolving loan are a guarantee through a blank bill of exchange or a simple third party guarantee.
Revolving loan repayment period
The period for which a revolving loan is concluded is usually set at one calendar year from its establishment, with the automatic possibility of extension for another calendar year. However, there are also banks that conclude a so-called they set a contract for an indefinite period and set the notice period of the loan at 3 months. This notice period allows the client to terminate the contractual relationship at any time without giving a reason. Failure to indicate the final maturity of the loan also theoretically facilitates the complexity of the administrative processes in the annual evaluation, so there is no need to create new contracts or amendments.
Revolving loan – interest and penalties
Setting up a revolving loan is usually free of charge. Its interest rate is variable, it is determined individually according to company statements and it is usually repaid once a month and only from the actually drawn part of the credit line. Usually, the interest rate is around 10 – 20%. Of course, the loan starts to bear interest from the first day of its drawdown. In the event that the client inadvertently manages to exceed the set limit for a revolving loan, penalty interest immediately arises, ranging from 30% upwards. At the same time, the client violates the bank’s contractual conditions.
Revolving credit serves primarily as a tool to bridge the short-term shortage of funds, and is therefore not appropriate and should not be used to finance longer-term investments.